Financial markets, Appunti di Marketing

Scarica Financial markets e più Appunti in PDF di Marketing solo su Docsity! CHAPTER 2 the function of financial markets is the one to channel funds from entities that have saved surplus funds to those who have a shortage of funds the funds can be channelled via 2 routes : direct finance ; borrowers borrow money directly from lenders by selling them securitites , which are ASSSETS for the LENDER but are LIABILITIES for the BORROWER . WHY IS THIS FUNCTION SO IMPORTANT ? people who save are not frequently the same who have profitable business opportunities THEY PRODUCE AN EFFICIENT ALLOCATION OF CAPITAL STRUCTURE OF FINANCIAL MARKETS A firm can obtain funds in a financial market in 2 ways : 1. issue a debt instrument with a certain maturity 2. raising funds by issuing equities , like claim to share the assets and the net income of a business.equities often make periodic payments called dividends which give you power to vote on issues important to the firm PAYMENT OF DEBT COMES FIRST THAN PAYMENT OF EQUITIES BUT EQUITY HOLDERS BENEFIT DIRECTLY OF INCREASES OF THE FIRM ASSETS THE MATURITY : long term : 10 yrs or longer short term : less than 1 yr PRIMARY MARKET : a market in which new issues of securities such as a bond or a stock are sold to INITIAL buyers . example : selling of securities behind close doors SECONDARY MARKET : market where securities that have been previously issued can be resold. example :the NYSE ( new York stock exchange ) or the NASDAQ ( national association securities dealers automated quotation system ) BROKERS AND DEALERS BROKER : agents of investors who match buyers with sellers of securities DEALERS : link buyers and sellers buy buying and selling securities at a stated price WHEN A BUYERS BUYS A SECURITY IN THE SECONDARY MARKET , THE CORPORATION WHO ISSUED THE SECURITY DOESN’T RECEIVE ANY FUNDS , CAUSE IT ALRDEADY RECEIVED FUNDS BUY ISSUING IN THE PRIMARY MARKET THE INVESTORS WHO BUY SECURITIES IN THE PRIMARY MARKET , WON’T PAY THEM MORE THAN WHAT THEY THINK WILL BE THE PRICE IN THE SECONDARY MARKET SECONDARY MARKET can be organised in 2 ways : 1. organize exchanges where buyers and sellers meet in one central place to conduct trades 2. OVER THE COUNTER MARKET (OTC) in which dealers in different location stand ready to sell and buy securities “over the counter “ to anyone want to accept their offers MONEY AND CAPITAL MARKETS MONEY MARKETS : only short-term debt securities are traded CAPITAL MARKET : longer-term debt and and equity instruments are traded MONEY MARKET SECURITIES ARE USUALLY MORE TRADED THAN CAPITAL MARKET SECURITITIES INTERNATIOAL BONDS MARKET FOREIGN BONDS : are sold in foreign countries and are denominated in that country’s currency EUROBONDS : a bond denominated in a currency different from the one of the country in which it is sold EUROCURRENCIES : currencies deposited in banks outside the home country ( EURODOLLARS ) INDIRECT FINANCE indirect finance involves a financial intermediary like for example a bank. the process of indirect finance is called FINANCIAL INTERMEDIATION FINANCIAL INTERMEDIARIES ARE A FAR MORE IMPORTAND SOURCE OF FINANCING THAN SECURITIES MARKETS ARE . why are financial intermediaries and financial intermediation so important ? 3. COUPON BOND : pays the owner of the bond a fixed interest payment every YEAR until the maturity date , when a specified final amount is paid ( FACE VALUE ). identified by 3 info ; corporation that issued it , maturity date , coupon rate . 4. DISCOUNT BOND : ( zero coupon bond ) bought at a price below the face value , and the face value is repaid at the end of the maturity date . NO INTEREST PAYMENTS YIELD TO MATURITY the interest rate that equates the present value of cash flows of a debt instrument with its value today SIMPLE LOAN : YIELD TO MATURITY IS EQUAL TO INTEREST RATE FIXED PAYMENT LOAN : LV ( LOAN VALUE ) = FP / ( 1 + i ) + ……. + FP / ( 1 + i )^n FP = fixed cash flow payment COUPON BOND : P( price of the coupon bond ) = C/( 1 + i ) + C/ ( 1 + i )^ n + F(face value of the bond )/ ( 1+ i)^n 1. WHEN THE COUPON IS PRICED AT ITS FACE VALUE , THE YIELD TO MATURITY EQUALS THE COUPON RATE 2. THE PRICE OF A BOND AND THE YIELD TO MATURITY ARE NEGATIVELY RELATED 3. THE YIELD TO MATURITY IS GREATER THAN THE COUPON RATE WHEN THE BOND PRICE IS BELOW THE FACE VALUE PERPETUITY ( special case of coupon bond ) coupon bond with NO MATURITY date and no REPAYMENT OF THE PRINCIPAL P = C/ i THERE YOU CAN SEE THE NEGATIVE RELATIONSHIP BETWEEN THE INTEREST RATE AND THE PRICE OF THE BOND CURRENT YIELD C/P = interest rate on long term bonds DISCOUNT BOND : i = (F-P)/P DISTINCTION BETWEEN REAL AND NOMINAL INTEREST RATES NOMINAL INTEREST RATE : not adjusted considering inflation REAL INTEREST RATE : adjusted considering inflation REAL INTEREST RATE IS MORE ACCURATELY DEFINED BY THE FISHER EQUATION FISHER EQUATION : i( nominal interest rate ) = ir (real interest rate ) + F 0 2 0F 0 7 0F 0 6 5F 0 2 8expected rate of inflation ) WHEN THE REAL INTEREST RATE IS LOW , THERE ARE GREATER INCENTIVES TO BORROW AND FEWER INCENTIVES TO LEND DISTINCTION BETWEEN INTEREST RATES AND RETURN RATE OF RETURN : defined as the payment to the owner plus the change of its value R = ( C + Pt+1 – Pt ) / Pt OR R= ic + g Pt = price of the bond at time t Pt+1 = price of the bond at time t+1 ic= current yield g= rate of capital gain IMPORTANT GENERAL FEATURES OF ALL BONDS 1. THE ONLY BOND OF WHICH THE CURRENT YIELD IS EQUAL TO THE RATE OF RETURN IS THE ONE OF WHICH THE MATURITY PERIOD IS EQUAL TO THE HOLDING PERIOD 2. A RISE IN INTEREST RATES IS EQUAL TO A FALL IN BOND PRICES 3. THE MORE DISTANT A BOND’S MATURITY THE GREATER THE SIZE OF THE PRICE CHANGE ASSOCIATED WITH AN INTEREST RATE CHANGE 4. EVEN THOUGH A BOND HAS A SUBSTANTIAL INTEREST RATE , ITS RETURN CAN TURN OUT TO BE NEGATIVE IF INTEREST RATES RISE VOLATILITY OF BOND RETURNS : price and returns for long term bonds are more volatile than the ones of short term bonds then they are more risky . we define as INTEREST RATE RISK is the riskiness of changes in the interest rates . one of this is the REINVESTMENT RISK .reinvestment risks occurs when the proceeds form a bond have to be reinvested in at a future interest rate that is uncertain WHEN THE HOLDING PERIOD IS LONGER THAN THE TERM TO MATURITY , YOU BENEFIT FROM A RISE IN INTEREST RATES , AND VICEVERSA LOSE FROM A FALL IN INTEREST RATES. CALCULATING DURATION TO MEASURE INTEREST RATES RISK duration is the average lifetime of a debt’s security stream of payments DUR: [ (1) ( CPt ) / ( 1 + i )t + (2) ( CPt ) / ( 1 + i )t ] / [ ( CPt ) / ( 1 + i )t + ( CPt ) / ( 1 + i )t ] ALL ELSE BEING EQUAL , THE LONGER THE TERM OF MATURITY THE LONGER THE DURATION ALL ELSE BEING EQUAL , WHEN INTEREST RATES RISES , THE DURATION OF A BOND FALLS ALL ELSE BEING EQUAL , THE HIGHER THE COUPON RATE THE LOWER THE DURATION CHAPTER 4 ASSET : piece of property that is a store of value 4 MAIN FACTORS HAVE TO BE CONSIDERED IN TO DTERMINE HOW TO CHISE AN ASSET WITH RESPECT TO ANOTHER 1)WEALTH : TOTAL RESOURCES OWNED BY THE INDIVIDUAL 2)EXPECTED RETURN : THE RETURN EXPECTED OOVER THE NEXT PERIOD 3) RISK : THE DEGREE OF UNCERTAINTY ASSOCIATED WITH THE RETURN 4) LIQUIDITY : THE EASE AN SPEED WITH WHICH AN ASSET CAN BE TURNED INTO CASH WEALTH holding everything else constant , an increase in wealth increases the quantity demanded of asset EXPECTED RETURN RE = p1 R1 + p2R2 + pnRn